by Victor Mayer, Head of International Private Wealth | Download this article (PDF)
Headline internal rate of return (IRR) figures on secondary strategies may look attractive on paper, but they rarely tell the whole story. There are other metrics to track that can also reveal more about the potential of any prospective investment – and the possible risk involved.
Over years of meeting investors across the globe, I’ve heard the same refrain: “The IRR looks strong.” But while secondaries strategies can often show a high IRR figure, especially if it’s presented as ‘since inception’, these figures can sometimes be overly flattering.
Because secondaries investors are acquiring de-risked assets at a discount, often with near-term distributions available, the potential IRR on offer can seem particularly attractive. But those distributions may be gated, or redemption windows may be limited, offering quarterly liquidity of up to 5% of a fund’s NAV. This can leave investors unable to realize those returns on demand, leaving that suggested IRR figure far out of reach.
Additionally, fund managers can manipulate IRR by timing the inflows, outflows, or large distributions from a fund. This can distort IRR, while in some cases leverage facilities can even be utilized to inflate it further.
All this is to say that while IRR is not irrelevant, it’s far from sufficient. As more investors engage with secondaries and evergreen structures, it’s time to reframe the narrative, and consider what pieces of data investors should be considering alongside IRR.
The metrics that matter
A more complete understanding of fund performance – especially in evergreen and secondary strategies – comes from a combination of total value to paid-in (TVPI), distributions to paid-in (DPI), and multiple on invested capital (MOIC) alongside an honest appraisal of liquidity, duration, and capital recycling.
TVPI is a core indicator of whether value is being created, not just returned. For secondary strategies, which buy closer to exit points, an early high TVPI signals successful acquisition at discount, portfolio de-risking, and manager execution.
But a mature asset bought at discount can only appreciate so far. Portfolio managers must carefully balance duration and what we might call ‘remaining value potential’, both critical dimensions of any deal, to protect liquidity without compromising compounding. TVPI serves as a north star, indicating whether value is being created, not just returned.
DPI, on the other hand, is where real returns are felt, and important when assessing secondaries. Why? Because secondaries focus on acquiring interests in existing private market funds, or in assets that often have shorter holding periods in comparison to traditional primary investments, which in turn produce quicker liquidity events.
As a realized return metric, DPI becomes particularly important in secondaries, as it offers a clearer picture of actual value creation and cash returns, making it more reliable than unrealized IRR, especially in volatile markets or when exit timing is uncertain.
While TVPI reflects both realized and unrealized gains, DPI can be king when it comes to measuring realized performance, showing how much capital has actually been returned to investors and enabling effective capital recycling.
Additionally, strong DPI in a secondaries portfolio enables capital recycling. Managers can reinvest distributed capital within the fund’s lifecycle, potentially boosting total returns and multiples. Funds that generate early DPI and efficiently redeploy that capital tend to outperform over time, as recycling beats dilution. The ideal scenario? Early DPI leads to more recycling, which in turn drives better compounding and stronger overall returns.
This recycling effect can be a key driver of enhanced total returns and higher fund multiples, allowing secondaries managers to compound value more efficiently than in strategies dependent solely on long-duration exits.
These metrics matter because they describe how capital is returned to investors or, in the case of evergreen funds, how capital is returned to the fund as these are accumulating vehicles. The critical pillar to the strength of evergreen funds is their ability to compound returns by recycling capital into new deals.
Some potential warning signs
High IRR, low TVPI?
May be driven by early distributions, with limited value creation. That could suggest optical performance, not economic value. This can only form a small part (if any) of an evergreen’s fund development, as it will inevitably generate underwhelming returns over time.
Low DPI in late-stage secondaries?
Could signal overpaying for assets or portfolio underperformance. In an evergreen structure, this may be a red flag as a highly mature private equity portfolio with limited distributions is unlikely to start generating performance.
High discounts vs. high quality
Bigger discounts aren’t always better. If a deal is widely discounted, it can drive short-term IRR but may come with a low DPI if assets are distressed or overvalued. Most importantly, secondary discounts remain an efficient mechanism in a highly intermediated market. As such, most high discounts are priced that way for a reason: there is less competition to buy the assets, which can be directly linked to the quality of NAV.
Secondaries vs. primary funds: what the metrics tell us
Against primary funds, secondaries should deliver:
- Higher IRRs before they erode
- Faster DPI and recycling
- Earlier TVPI uplift supported by longer-term recycling-induced TVPI
The bottom line
Relying solely on IRR can be misleading, as it may overstate returns in funds with early distributions but limited long-term upside. It should be used as a signpost, not as a final destination. Investors should always ask: is the IRR figure backed by strong, early DPI? Is there evidence of active capital recycling? Does TVPI reflect thoughtful underwriting and value creation?
Any IRR figure should be triangulated with MOIC, DPI, TVPI, liquidity constraints, and drawdowns to get a full picture of risk and return. IRR can look great on paper, but if the liquidity profile is poor or returns are back-loaded, a client’s investments could be headed in the wrong direction.
More from our Decoding Private Markets series
Are you getting real access — or just buying the hype?
Why access to everything is not access to alpha
Recycling over raising: The compounding edge in evergreen and secondary funds
Understanding structures in private markets: Blending open- and closed-ended funds
